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SUPPLEMENT DATED OCTOBER 1, 1998 TO PROSPECTUS
DATED JANUARY 25, 1998 OF THE OAKMARK FAMILY OF FUNDS
THE OAKMARK FUND
THE OAKMARK SELECT FUND
The rates of advisory fees paid by the Funds are shown on page 30 of the
prospectus. Effective October 1, 1998, the breakpoints in the schedules of
advisory fees for The Oakmark Fund and The Oakmark Select Fund will be changed.
Under the revised fee schedules, the annual rate of advisory fee for The Oakmark
Fund on net assets in excess of $10 billion is reduced to .80%, and for The
Oakmark Select Fund, the annual rate of advisory fee on net assets in excess of
$5 billion is reduced to .75%.
THE OAKMARK SMALL CAP FUND
RE-OPENING OF THE FUND
The Oakmark Small Cap Fund re-opened to purchases by new investors effective
August 31, 1998.
THE OAKMARK FAMILY OF FUNDS
REDUCED MINIMUM INVESTMENT
The minimum initial investment for each fund is now $500 for any investor who
elects the Automatic Investment Plan or the Payroll Deduction Plan.
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STATEMENT OF ADDITIONAL INFORMATION
JANUARY 25, 1998
SUPPLEMENTED OCTOBER 1, 1998
THE OAKMARK FAMILY OF FUNDS
No-Load Funds
Two North La Salle Street
Chicago, Illinois 60602-3790
Telephone 1-800-OAKMARK
(1-800-625-6275)
This Statement of Additional Information relates to The Oakmark Fund ("Oakmark
Fund"), The Oakmark Select Fund ("Select Fund"), The Oakmark Small Cap Fund
("Small Cap Fund"), The Oakmark Equity and Income Fund, formerly named the
Oakmark Balanced Fund ("Equity and Income Fund"), The Oakmark International Fund
("International Fund") and The Oakmark International Small Cap Fund
("International Small Cap Fund"), each a series of Harris Associates Investment
Trust (the "Trust"). It is not a prospectus but provides information that
should be read in conjunction with the Funds' prospectus dated the same date as
this Statement of Additional Information and any supplement thereto. The
prospectus may be obtained from the Funds at no charge by writing or telephoning
the Funds at their address or telephone number shown above.
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TABLE OF CONTENTS
THE FUNDS . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . 2
HOW THE FUNDS INVEST. . . . . . . . . . . . . . . . . . . . . . 4
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . 10
INVESTMENT ADVISER. . . . . . . . . . . . . . . . . . . . . . . 12
TRUSTEES AND OFFICERS . . . . . . . . . . . . . . . . . . . . . 14
PRINCIPAL SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . 15
PURCHASING AND REDEEMING SHARES . . . . . . . . . . . . . . . . 16
ADDITIONAL TAX INFORMATION. . . . . . . . . . . . . . . . . . . 18
TAXATION OF FOREIGN SHAREHOLDERS. . . . . . . . . . . . . . . . 18
PORTFOLIO TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . 19
DECLARATION OF TRUST. . . . . . . . . . . . . . . . . . . . . . 21
CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
INDEPENDENT PUBLIC ACCOUNTANTS. . . . . . . . . . . . . . . . . 22
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . 22
APPENDIX -- BOND RATINGS. . . . . . . . . . . . . . . . . . . . 23
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THE FUNDS
OAKMARK FUND seeks long-term capital appreciation by investing primarily in
U.S. equity securities.
SELECT FUND seeks long-term capital appreciation by investing primarily in
a non-diversified portfolio of U.S. equity securities.
SMALL CAP FUND seeks long-term capital appreciation by investing primarily
in U.S. equity securities of companies with small market capitalizations.
EQUITY AND INCOME FUND seeks high current income with regard for both
preservation and growth of capital by investing primarily in a diversified
portfolio of U.S. equity and fixed-income securities.
INTERNATIONAL FUND seeks long-term capital appreciation by investing
primarily in equity securities of non-U.S. issuers.
INTERNATIONAL SMALL CAP FUND seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers with small market
capitalizations.
INVESTMENT RESTRICTIONS
In pursuing their respective investment objectives no Fund will:
1. [THIS RESTRICTION DOES NOT APPLY TO SELECT FUND] In regard to 75% of
its assets, invest more than 5% of its assets (valued at the time of investment)
in securities of any one issuer, except in U.S. government obligations;
2. Acquire securities of any one issuer which at the time of investment
(a) represent more than 10% of the voting securities of the issuer or (b) have a
value greater than 10% of the value of the outstanding securities of the issuer;
3. Invest more than 25% of its assets (valued at the time of investment)
in securities of companies in any one industry, except that this restriction
does not apply to investments in U.S. government obligations;
4. Borrow money except from banks for temporary or emergency purposes in
amounts not exceeding 10% of the value of the Fund's assets at the time of
borrowing [the Fund will not purchase additional securities when its borrowings,
less receivables from portfolio securities sold, exceed 5% of the value of the
Fund's total assets];
5. Issue any senior security except in connection with permitted
borrowings;
6. Underwrite the distribution of securities of other issuers; however
the Fund may acquire "restricted" securities which, in the event of a resale,
might be required to be registered under the Securities Act of 1933 on the
ground that the Fund could be regarded as an underwriter as defined by that act
with respect to such resale;
7. Make loans, but this restriction shall not prevent the Fund from (a)
investing in debt obligations, (b) investing in repurchase agreements,(1) or
(c) [FUNDS OTHER THAN OAKMARK
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(1) A repurchase agreement involves a sale of securities to a Fund with the
concurrent agreement of the seller (bank or securities dealer) to
repurchase the securities at the same price plus an amount equal to an
agreed-upon interest rate within a specified time. In the
2
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FUND] lending its portfolio securities [the Fund will not lend securities having
a value in excess of 33% of its assets, including collateral received for loaned
securities (valued at the time of any loan)];
8. Purchase and sell real estate or interests in real estate, although it
may invest in marketable securities of enterprises which invest in real estate
or interests in real estate;
9. Purchase and sell commodities or commodity contracts, except that it
may enter into forward foreign currency contracts;
10. Acquire securities of other investment companies except (a) by
purchase in the open market, where no commission or profit to a sponsor or
dealer results from such purchase other than the customary broker's commission
or (b) where the acquisition results from a dividend or a merger, consolidation
or other reorganization;(2)
11. Make margin purchases or participate in a joint or on a joint or
several basis in any trading account in securities;
12. Invest in companies for the purpose of management or the exercise of
control;
13. Invest more than 15% of its net assets (valued at the time of
investment) in illiquid securities, including repurchase agreements maturing in
more than seven days;
14. Invest in oil, gas or other mineral leases or exploration or
development programs, although it may invest in marketable securities of
enterprises engaged in oil, gas or mineral exploration;
15. [OAKMARK FUND, SELECT FUND, SMALL CAP FUND AND EQUITY AND INCOME FUND
ONLY] Invest more than 2% of its net assets (valued at the time of investment)
in warrants not listed on the New York or American stock exchanges, valued at
cost, nor more than 5% of its net assets in all warrants, provided that warrants
acquired in units or attached to other securities shall be deemed to be without
value for purposes of this restriction; [INTERNATIONAL FUND AND INTERNATIONAL
SMALL CAP FUND ONLY] Invest more than 10% of its net assets (valued at the time
of investment) in warrants valued at the lower of cost or market, provided that
warrants acquired in units or attached to securities shall be deemed to be
without value for purposes of this restriction;
16. [OAKMARK FUND, SELECT FUND AND SMALL CAP FUND ONLY] Invest more than
25% of its total assets (valued at the time of investment) in securities of non-
U.S. issuers (other than securities represented by American Depositary Receipts)
[EQUITY AND INCOME FUND ONLY] Invest
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event of a bankruptcy or other default of a seller of a repurchase
agreement, the Fund could experience both delays in liquidating the
underlying securities and losses. No Fund may invest more than 15% of its
net assets in repurchase agreements maturing in more than seven days and
other illiquid securities.
(2) In addition to this investment restriction, the Investment Company Act of
1940 provides that a Fund may neither purchase more than 3% of the voting
securities of any one investment company nor invest more than 10% of the
Fund's assets (valued at the time of investment) in all investment company
securities purchased by the Fund. Investment in the shares of another
investment company would require the Fund to bear a portion of the
management and advisory fees paid by that investment company, which might
duplicate the fees paid by the Fund.
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more than 10% of its total assets (valued at the time of investment) in
securities of non-U.S. issuers (other than securities represented by American
Depositary Receipts);(3)
17. Make short sales of securities unless the Fund owns at least an equal
amount of such securities, or owns securities that are convertible or
exchangeable, without payment of further consideration, into at least an equal
amount of such securities;
18. Purchase a call option or a put option if the aggregate premium paid
for all call and put options then held exceed 20% of its net assets (less the
amount by which any such positions are in-the-money);
19. Invest in futures or options on futures, except that it may invest in
forward foreign currency contracts.
The first 10 restrictions listed above, except the bracketed portions, are
fundamental policies and may be changed only with the approval of the holders of
a "majority of the outstanding voting securities" of the respective Fund, which
is defined in the Investment Company Act of 1940 (the "1940 Act") as the lesser
of (i) 67% of the shares of the Fund present at a meeting if more than 50% of
the outstanding shares of the Fund are present in person or represented by proxy
or (ii) more than 50% of the outstanding shares of the Fund. Those restrictions
not designated as "fundamental," and a Fund's investment objective, may be
changed by the board of trustees without shareholder approval. A Fund's
investment objective will not be changed without at least 30 days' notice to
shareholders.
Notwithstanding the foregoing investment restrictions, a Fund may purchase
securities pursuant to the exercise of subscription rights, provided, in the
case of each Fund other than Select Fund, that such purchase will not result in
the Fund's ceasing to be a diversified investment company. Japanese and
European corporations frequently issue additional capital stock by means of
subscription rights offerings to existing shareholders at a price substantially
below the market price of the shares. The failure to exercise such rights would
result in a Fund's interest in the issuing company being diluted. The market
for such rights is not well developed in all cases and, accordingly, a Fund may
not always realize full value on the sale of rights. The exception applies in
cases where the limits set forth in the investment restrictions would otherwise
be exceeded by exercising rights or would have already been exceeded as a result
of fluctuations in the market value of a Fund's portfolio securities with the
result that the Fund would be forced either to sell securities at a time when it
might not otherwise have done so, or to forego exercising the rights.
HOW THE FUNDS INVEST
SECURITIES OF NON-U.S. ISSUERS
International Fund and International Small Cap Fund invest primarily in
securities of non-U.S. issuers, and the other Funds each may invest a minor
portion of their assets (up to 25% for Oakmark Fund, Select Fund and Small Cap
Fund and up to 10% for Equity and Income Fund) in securities of non-U.S.
issuers. International investing permits an investor to take advantage of the
growth in markets outside the United States. Investing in securities of non-U.S.
issuers may entail a greater degree of risk (including risks relating to
exchange rate fluctuations, tax provisions, or expropriation of assets) than
does investment in securities of domestic issuers. The Funds may invest in
securities of non-U.S. issuers directly or in the form of American Depositary
Receipts
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(3) Although securities represented by American Depositary Receipts ("ADRs")
are not subject to restriction 16, none of these Funds has any present
intention to invest more than the indicated percentage of its total assets
in ADRs and securities of foreign issuers.
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(ADRs), European Depositary Receipts (EDRs), Global Depositary Receipts (GDRs),
or other securities representing underlying shares of foreign issuers.
Positions in these securities are not necessarily denominated in the same
currency as the common stocks into which they may be converted. ADRs are
receipts typically issued by an American bank or trust company and trading in
U.S. markets evidencing ownership of the underlying securities. EDRs are
European receipts evidencing a similar arrangement. Generally ADRs, in
registered form, are designed for use in the U.S. securities markets and EDRs,
in bearer form, are designed for use in European securities markets. GDRs are
receipts that may trade in U.S. or non-U.S. markets. The Funds may invest in
both "sponsored" and "unsponsored" ADRs, EDRs or GDRs. In a sponsored
depositary receipt, the issuer typically pays some or all of the expenses of the
depository and agrees to provide its regular shareholder communications to
depositary receipt holders. An unsponsored depositary receipt is created
independently of the issuer of the underlying security. The depositary receipt
holders generally pay the expenses of the depository and do not have an
undertaking from the issuer of the underlying security to furnish shareholder
communications.
With respect to portfolio securities of non-U.S. issuers or denominated in
foreign currencies, a Fund's investment performance is affected by the strength
or weakness of the U.S. dollar against these currencies. For example, if the
dollar falls in value relative to the Japanese yen, the dollar value of a yen-
denominated stock held in the portfolio will rise even though the price of the
stock remains unchanged. Conversely, if the dollar rises in value relative to
the yen, the dollar value of the yen-denominated stock will fall. See
discussion of transaction hedging and portfolio hedging under "Currency Exchange
Transactions."
You should understand and consider carefully the risks involved in
international investing. Investing in securities of non-U.S. issuers, positions
in which are generally denominated in foreign currencies, and utilization of
forward foreign currency exchange contracts involve certain considerations
comprising both risks and opportunities not typically associated with investing
in U.S. securities. These considerations include: fluctuations in exchange
rates of foreign currencies; possible imposition of exchange control regulation
or currency restrictions that would prevent cash from being brought back to the
United States; less public information with respect to issuers of securities;
less governmental supervision of stock exchanges, securities brokers, and
issuers of securities; different accounting, auditing and financial reporting
standards; different settlement periods and trading practices; less liquidity
and frequently greater price volatility in foreign markets than in the United
States; imposition of foreign taxes; and sometimes less advantageous legal,
operational and financial protections applicable to foreign subcustodial
arrangements.
Although the Funds try to invest in companies and governments of countries
having stable political environments, there is the possibility of expropriation
of assets, confiscatory taxation, seizure or nationalization of foreign bank
deposits or other assets, establishment of exchange controls, the adoption of
foreign government restrictions, or other adverse, political, social or
diplomatic developments that could affect investment in these nations.
PRIVATIZATIONS. Some governments have been engaged in programs of selling
part or all of their stakes in government owned or controlled enterprises
("privatizations"). The adviser believes that privatizations may offer
opportunities for significant capital appreciation, and intends to invest assets
of International Fund and International Small Cap Fund in privatizations in
appropriate circumstances. In certain of those markets, the ability of foreign
entities such as International Fund and International Small Cap Fund to
participate in privatizations may be limited by local law, and/or the terms on
which such Funds may be permitted to participate may be less advantageous than
those afforded local investors. There can be no assurance that governments will
continue to sell companies currently owned or controlled by them or that
privatization programs will be successful.
CURRENCY EXCHANGE TRANSACTIONS. Each Fund may enter into currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate for purchasing
or selling currency
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prevailing in the foreign exchange market or through a forward currency exchange
contract ("forward contract"). A forward contract is an agreement to purchase
or sell a specified currency at a specified future date (or within a specified
time period) and price set at the time of the contract. Forward contracts are
usually entered into with banks, foreign exchange dealers or broker-dealers, are
not exchange-traded and are usually for less than one year, but may be renewed.
Forward currency transactions may involve currencies of the different
countries in which a Fund may invest, and serve as hedges against possible
variations in the exchange rate between these currencies. A Fund's currency
transactions are limited to transaction hedging and portfolio hedging involving
either specific transactions or actual or anticipated portfolio positions.
Transaction hedging is the purchase or sale of a forward contract with respect
to specific receivables or payables of a Fund accruing in connection with the
purchase or sale of portfolio securities. Portfolio hedging is the use of a
forward contract with respect to an actual or anticipated portfolio security
position denominated or quoted in a particular currency. When the Fund owns or
anticipates owning securities in countries whose currencies are linked, the
Adviser may aggregate such positions as to the currency hedged.
If a Fund enters into a forward contract hedging an anticipated purchase of
portfolio securities, liquid assets of the Fund, which may include equities,
debt obligations, U.S. government securities or cash, having a value at least as
great as the commitment under the forward contract will be segregated on the
books of the Fund, marked to market daily, and held by the Fund's custodian
while the contract is outstanding.
At the maturity of a forward contract to deliver a particular currency, a
Fund may either sell the portfolio security related to such contract and make
delivery of the currency, or it may retain the security and either acquire the
currency on the spot market or terminate its contractual obligation to deliver
the currency by purchasing an offsetting contract with the same currency trader
obligating it to purchase on the same maturity date the same amount of the
currency.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of a forward contract. Accordingly, it
may be necessary for a Fund to purchase additional currency on the spot market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of currency the Fund is obligated to deliver and if a
decision is made to sell the security and make delivery of the currency.
Conversely, it may be necessary to sell on the spot market some of the currency
received upon the sale of the portfolio security if its market value exceeds the
amount of currency the Fund is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. If the Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
currency. Should forward prices decline during the period between the Fund's
entering into a forward contract for the sale of a currency and the date it
enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, the Fund will suffer a loss to the extent the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. A default on the contract would deprive the Fund of unrealized
profits or force the Fund to cover its commitments for purchase or sale of
currency, if any, at the current market price.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to the Fund of
engaging in currency exchange
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transactions varies with such factors as the currency involved, the length of
the contract period, and prevailing market conditions. Since currency exchange
transactions are usually conducted on a principal basis, no fees or commissions
are involved.
DEBT SECURITIES
Each Fund may invest in debt securities, including lower-rated securities
(i.e., securities rated BB or lower by Standard & Poor's Corporation ("S&P") or
Ba or lower by Moody's Investor Services, Inc. ("Moody's"), commonly called
"junk bonds") and securities that are not rated. There are no restrictions as
to the ratings of debt securities acquired by a Fund or the portion of a Fund's
assets that may be invested in debt securities in a particular ratings category,
except that International Fund and International Small Cap Fund will not invest
more than 10% of their respective total assets in securities rated below
investment grade, Equity and Income Fund will not invest more than 20% of its
total assets in such securities, and each of the other Funds will not invest
more than 25% of its total assets in such securities.
Securities rated BBB or Baa are considered to be medium grade and to have
speculative characteristics. Lower-rated debt securities are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal. Investment in medium- or lower-quality debt securities involves
greater investment risk, including the possibility of issuer default or
bankruptcy. An economic downturn could severely disrupt the market for such
securities and adversely affect the value of such securities. In addition,
lower-quality bonds are less sensitive to interest rate changes than higher-
quality instruments and generally are more sensitive to adverse economic changes
or individual corporate developments. During a period of adverse economic
changes, including a period of rising interest rates, issuers of such bonds may
experience difficulty in servicing their principal and interest payment
obligations.
Medium- and lower-quality debt securities may be less marketable than
higher-quality debt securities because the market for them is less broad. The
market for unrated debt securities is even narrower. During periods of thin
trading in these markets, the spread between bid and asked prices is likely to
increase significantly, and a Fund may have greater difficulty selling its
portfolio securities. See "Net Asset Value." The market value of these
securities and their liquidity may be affected by adverse publicity and investor
perceptions.
A description of the characteristics of bonds in each ratings category is
included in the appendix to this statement of additional information.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
Each Fund may purchase securities on a when-issued or delayed-delivery
basis. Although the payment and interest terms of these securities are
established at the time a Fund enters into the commitment, the securities may be
delivered and paid for a month or more after the date of purchase, when their
value may have changed. A Fund makes such commitments only with the intention
of actually acquiring the securities, but may sell the securities before
settlement date if the adviser deems it advisable for investment reasons. A
Fund may utilize spot and forward foreign currency exchange transactions to
reduce the risk inherent in fluctuations in the exchange rate between one
currency and another when securities are purchased or sold on a when-issued or
delayed-delivered basis.
At the time a Fund enters into a binding obligation to purchase securities
on a when-issued basis, liquid assets of the Fund having a value at least as
great as the purchase price of the securities to be purchased will be segregated
on the books of the Fund and held by the custodian throughout the period of the
obligation. The use of these investment strategies, as well as any borrowing by
a Fund, may increase net asset value fluctuation.
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ILLIQUID SECURITIES
No Fund may invest in illiquid securities, if as a result such securities
would comprise more than 15% of the value of the Fund's assets.
If through the appreciation of illiquid securities or the depreciation of
liquid securities, the Fund should be in a position where more than 15% of the
value of its net assets are invested in illiquid assets, including restricted
securities, the Fund will take appropriate steps to protect liquidity.
Illiquid securities may include restricted securities, which may be sold
only in privately negotiated transactions or in a public offering with respect
to which a registration statement is in effect under the Securities Act of 1933
(the "1933 Act"). Where a Fund holds restricted securities and registration is
required, the Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a less favorable price than
prevailed when it decided to sell. Restricted securities will be priced at fair
value as determined in good faith by the board of trustees.
Notwithstanding the above, each Fund may purchase securities that, although
privately placed, are eligible for purchase and sale under Rule 144A under the
1933 Act. This rule permits certain qualified institutional buyers, such as the
Funds, to trade in privately placed securities even though such securities are
not registered under the 1933 Act. The adviser, under the supervision of the
board of trustees, may consider whether securities purchased under Rule 144A are
liquid and thus not subject to the Fund's restriction of investing no more than
15% of its assets in illiquid securities. (See restriction 13 under "Investment
Restrictions.") A determination of whether a Rule 144A security is liquid or
not is a question of fact. In making this determination the adviser will
consider the trading markets for the specific security taking into account the
unregistered nature of a Rule 144A security. In addition, the adviser could
consider the (1) frequency of trades and quotes, (2) number of dealers and
potential purchasers, (3) dealer undertakings to make a market, (4) and the
nature of the security and of market place trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer). The liquidity of Rule 144A securities would be monitored and, if as
a result of changed conditions, it is determined that a Rule 144A security is no
longer liquid, the Fund's holdings of illiquid securities would be reviewed to
determine what, if any, steps are required to assure that the Fund does not
invest more than 15% of its assets in illiquid securities. Investing in Rule
144A securities could have the effect of increasing the amount of a Fund's
assets invested in illiquid securities if qualified institutional buyers are
unwilling to purchase such securities.
SHORT SALES
Each Fund may sell securities short against the box, that is: (1) enter
into short sales of securities that it currently owns or has the right to
acquire through the conversion or exchange of other securities that it owns
without additional consideration; and (2) enter into arrangements with the
broker-dealers through which such securities are sold short to receive income
with respect to the proceeds of short sales during the period the Fund's short
positions remain open. A Fund may make short sales of securities only if at all
times when a short position is open the Fund owns at least an equal amount of
such securities or securities convertible into or exchangeable for, without
payment of any further consideration, securities of the same issue as, and equal
in amount to, the securities sold short.
In a short sale against the box, a Fund does not deliver from its portfolio
the securities sold and does not receive immediately the proceeds from the short
sale. Instead, the Fund borrows the securities sold short from a broker-dealer
through which the short sale is executed, and the broker-dealer delivers such
securities, on behalf of the Fund, to the purchaser of such
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securities. Such broker-dealer is entitled to retain the proceeds from the
short sale until the Fund delivers to such broker-dealer the securities sold
short. In addition, the Fund is required to pay to the broker-dealer the amount
of any dividends paid on shares sold short. Finally, to secure its obligation
to deliver to such broker-dealer the securities sold short, the Fund must
deposit and continuously maintain in a separate account with the Fund's
custodian an equivalent amount of the securities sold short or securities
convertible into or exchangeable for such securities without the payment of
additional consideration. A Fund is said to have a short position in the
securities sold until it delivers to the broker-dealer the securities sold, at
which time the Fund receives the proceeds of the sale. A Fund may close out a
short position by purchasing on the open market and delivering to the
broker-dealer an equal amount of the securities sold short, rather than by
delivering portfolio securities.
Short sales may protect a Fund against the risk of losses in the value of
its portfolio securities because any unrealized losses with respect to such
portfolio securities should be wholly or partially offset by a corresponding
gain in the short position. However, any potential gains in such portfolio
securities should be wholly or partially offset by a corresponding loss in the
short position. The extent to which such gains or losses are offset will depend
upon the amount of securities sold short relative to the amount the Fund owns,
either directly or indirectly, and, in the case where the Fund owns convertible
securities, changes in the conversion premium.
Short sale transactions involve certain risks. If the price of the
security sold short increases between the time of the short sale and the time a
Fund replaces the borrowed security, the Fund will incur a loss and if the price
declines during this period, the Fund will realize a short-term capital gain.
Any realized short-term capital gain will be decreased, and any incurred loss
increased, by the amount of transaction costs and any premium, dividend or
interest which the Fund may have to pay in connection with such short sale.
Certain provisions of the Internal Revenue Code may limit the degree to which a
Fund is able to enter into short sales. There is no limitation on the amount of
each Fund's assets that, in the aggregate, may be deposited as collateral for
the obligation to replace securities borrowed to effect short sales and
allocated to segregated accounts in connection with short sales. No Fund
currently expects that more than 20% of its total assets would be involved in
short sales against the box.
OPTIONS
Each Fund may purchase both call options and put options on securities. A
call or put option is a contract that gives the Fund, in return for a premium
paid upon purchase of the option, the right during the term of the option to buy
from, or to sell to, the seller of the option the security underlying the option
at a specified exercise price. The option is valued initially at the premium
paid for the option. Thereafter, the value of the option is marked-to-market
daily. It is expected that a Fund will not purchase a call option or a put
option if the aggregate value of all call and put options held by the Fund would
exceed 5% of the Fund's net assets.
TEMPORARY STRATEGIES
Each Fund has the flexibility to respond promptly to changes in market and
economic conditions. In the interest of preserving shareholders' capital, the
adviser may employ a temporary defensive investment strategy if it determines
such a strategy to be warranted. Pursuant to such a defensive strategy, a Fund
temporarily may hold cash (U.S. dollars, foreign currencies, or multinational
currency units) and/or invest up to 100% of its assets in high quality debt
securities or money market instruments of U.S. or foreign issuers, and most or
all of International Fund's investments and International Small Cap Fund's
investments may be made in the United States and denominated in U.S. dollars.
It is impossible to predict whether, when or for how long a Fund will employ
defensive strategies.
In addition, pending investment of proceeds from new sales of Fund shares
or to meet ordinary daily cash needs, each Fund temporarily may hold cash (U.S.
dollars, foreign currencies
9
<PAGE>
or multinational currency units) and may invest any portion of its assets in
money market instruments.
PERFORMANCE INFORMATION
From time to time the Funds may quote total return figures in sales
material. "Total Return" for a period is the percentage change in value during
the period of an investment in Fund shares, including the value of shares
acquired through reinvestment of all dividends and capital gains distributions.
"Average Annual Total Return" is the average annual compounded rate of change in
value represented by the Total Return for the period.
Average Annual Total Return will be computed as follows:
n
ERV = P(1+T)
Where: P = the amount of an assumed initial investment in Fund shares
T = average annual total return
n = number of years from initial investment to the end of the
period
ERV = ending redeemable value of shares held at the end of the
period
For example, Total Return and Average Annual Total Return on a $1,000
investment in each Fund for the following periods ended September 30, 1997 were:
<TABLE>
<CAPTION>
Total Average Annual
Return Total Return
------ --------------
<S> <C> <C>
Oakmark Fund
One year . . . . . . . . . . . 37.1% 37.1%
Five years . . . . . . . . . . 209.6 25.3
Life of Fund*. . . . . . . . . 420.1 30.7
Select Fund
Life of Fund*. . . . . . . . . 63.4 69.2
Small Cap Fund
One year . . . . . . . . . . . 53.5 53.5
Life of Fund*. . . . . . . . . 103.4 44.8
Equity and Income Fund
One year . . . . . . . . . . . 34.0 34.0
Life of Fund*. . . . . . . . . 48.1 22.7
International Fund
One year . . . . . . . . . . . 29.6 29.6
Five years . . . . . . . . . . 132.8 18.4
Life of Fund*. . . . . . . . . 132.8 18.4
International Small Cap Fund
One year . . . . . . . . . . . 12.1 12.1
Life of Fund*. . . . . . . . . 26.7 13.1
</TABLE>
- ------------------
* Life of Fund commenced with the public offering of its shares as follows:
Oakmark, 8/5/91; Select, 11/1/96; International, 9/30/92; Small Cap, Equity
and Income and International Small Cap, 11/1/95.
Performance figures quoted by the Funds will assume reinvestment of all
dividends and distributions, but will not take into account income taxes payable
by shareholders. The Funds impose no sales charge and pay no distribution
("12b-1") expenses. Each Fund's performance is a function of conditions in the
securities markets, portfolio management, and operating expenses.
10
<PAGE>
Although information such as yield and total return is useful in reviewing a
Fund's performance and in providing some basis for comparison with other
investment alternatives, it should not be used for comparison with other
investments using different reinvestment assumptions or time periods.
In advertising and sales literature, the performance of a Fund may be
compared with that of other mutual funds, indexes or averages of other mutual
funds, indexes of related financial assets or data, and other competing
investment and deposit products available from or through other financial
institutions. The composition of these indexes or averages differs from that of
the Funds. Comparison of a Fund to an alternative investment should consider
differences in features and expected performance.
All of the indexes and averages noted below will be obtained from the
indicated sources or reporting services, which the Funds generally believe to be
accurate. The Funds may also refer to publicity (including performance
rankings) in newspapers, magazines, or other media from time to time. However,
the Funds assume no responsibility for the accuracy of such data. Newspapers
and magazines that might mention the Funds include, but are not limited to, the
following:
<TABLE>
<CAPTION>
<S> <C> <C>
Barron's Fortune The New York Times
Business Week Global Finance Pensions and Investments
Changing Times Investor's Business Daily Personal Investor
Chicago Tribune Kiplinger's Personal Finance Smart Money
Chicago Sun-Times Los Angeles Times Stanger Reports
Crain's Chicago Business Money Time
Consumer Reports Mutual Fund Letter USA Today
Consumer Digest Mutual Funds Magazine U.S. News and World Report
Financial World Morningstar The Wall Street Journal
Forbes Newsweek Worth
</TABLE>
A Fund may compare its performance to the Consumer Price Index (All Urban),
a widely recognized measure of inflation. The performance of a Fund may also be
compared to the Morgan Stanley EAFE (Europe, Australia and Far East) Index*, a
generally accepted benchmark for performance of major overseas markets, and to
the following indexes or averages:
Dow-Jones Industrial Average* Wilshire 5000
Standard & Poor's 500 Stock Index* New York Stock Exchange Composite Index
Standard & Poor's 400 Industrials American Stock Exchange Composite Index
Standard & Poor's Small Cap 600* NASDAQ Composite
Standard & Poor's Mid Cap 400* NASDAQ Industrials
Russell 2000
In addition, each of Oakmark Fund, Select Fund, Small Cap Fund and Equity
and Income Fund may compare its performance to the following indexes and
averages: Value Line Index; Lipper Capital Appreciation Fund Average; Lipper
Growth Funds Average; Lipper Small Company Growth Funds Average; Lipper General
Equity Funds Average; Lipper Equity Funds Average; Lipper Small Company Growth
Fund Index; and Lehman Brothers Government/Corporate Bond Index. Each of
International Fund and International Small Cap Fund may compare its performance
to the following indexes and averages: Lipper International & Global Funds
Average; Lipper International Fund Index; Lipper International Equity Funds
Average; Micropal International Small Company Fund Index; Morgan Stanley Capital
International World ex the U.S. Index*; Morningstar International Stock Average.
- ----------------------
* with dividends reinvested
11
<PAGE>
Lipper Indexes and Averages are calculated and published by Lipper
Analytical Services, Inc. ("Lipper"), an independent service that monitors the
performance of more than 1,000 funds. The Funds may also use comparative
performance as computed in a ranking by Lipper or category averages and rankings
provided by another independent service. Should Lipper or another service
reclassify a Fund to a different category or develop (and place a Fund into) a
new category, that Fund may compare its performance or ranking against other
funds in the newly assigned category, as published by the service. Each Fund
may also compare its performance or ranking against all funds tracked by Lipper
or another independent service, including Morningstar, Inc.
The Funds may cite their ratings, recognition, or other mention by
Morningstar or any other entity. Morningstar's rating system is based on
risk-adjusted total return performance and is expressed in a star-rating format.
The risk-adjusted number is computed by subtracting a fund's risk score (which
is a function of the fund's monthly returns less the 3-month T-bill return) from
the fund's load-adjusted total return score. This numerical score is then
translated into rating categories, with the top 10% labeled five star, the next
22.5% labeled four star, the next 35% labeled three star, the next 22.5% labeled
two star, and the bottom 10% one star. A high rating reflects either
above-average returns or below-average risk or both.
To illustrate the historical returns on various types of financial assets,
the Funds may use historical data provided by Ibbotson Associates, Inc.
("Ibbotson"), a Chicago-based investment firm. Ibbotson constructs (or obtains)
very long-term (since 1926) total return data (including, for example, total
return indexes, total return percentages, average annual total returns and
standard deviations of such returns) for the following asset types: common
stocks; small company stocks; long-term corporate bonds; long-term government
bonds; intermediate-term government bonds; U.S. Treasury bills; and Consumer
Price Index.
INVESTMENT ADVISER
The Funds' investment adviser, Harris Associates L.P. (the "Adviser"),
furnishes continuing investment supervision to the Funds and is responsible for
overall management of the Funds' business affairs pursuant to investment
advisory agreements relating to the respective Funds (the "Agreements"). The
Adviser furnishes office space, equipment and personnel to the Funds, and
assumes the expenses of printing and distributing the Funds' prospectus and
reports to prospective investors.
Each Fund pays the cost of its custodial, stock transfer, dividend
disbursing, bookkeeping, audit and legal services. Each Fund also pays other
expenses such as the cost of proxy solicitations, printing and distributing
notices and copies of the prospectus and shareholder reports furnished to
existing shareholders, taxes, insurance premiums, the expenses of maintaining
the registration of that Fund's shares under federal and state securities laws
and the fees of trustees not affiliated with the Adviser.
The Adviser has voluntarily agreed to reimburse each Fund to the extent
that its annual ordinary operating expenses exceed the following percent of the
Fund's average net assets through January 31, 1999, subject to earlier
termination by the Adviser on 30 days' notice to the Fund: 1.5% in the case of
Oakmark Fund, Select Fund, Small Cap Fund or Equity and Income Fund and 2% in
the case of International Fund and International Small Cap Fund. For the
purpose of determining whether a Fund is entitled to any reduction in advisory
fee or expense reimbursement, that Fund's expenses are calculated daily and any
reduction in fee or reimbursement is made monthly.
12
<PAGE>
For its services as investment adviser, the Adviser receives from each Fund
a monthly fee based on that Fund's net assets at the end of the preceding month.
Basing the fee on net assets at the end of the preceding month has the effect of
(i) delaying the impact of changes in assets on the amount of the fee and (ii)
in the first year of a fund's operation, reducing the amount of the aggregate
fee by providing for no fee in the first month of operation. The annual rates
of fees as a percentage of each Fund's net assets are as follows:
<TABLE>
<CAPTION>
FUND FEE
- ----------------- ---------------------------------------------
<S> <C>
Equity and Income .75%
Oakmark 1% up to $2.5 billion; .95% on the next
$1.25 billion; .90% on the next
$1.25 billion; .85% on net assets in excess
of $5 billion; and .80% on net assets in
excess of $10 billion
International 1% up to $2.5 billion; .95% on the next
$2.5 billion; and .90% on net assets in
excess of $5 billion
Select 1% up to $1 billion; .95% on the next
$500 million; .90% on the next $500 million;
.85% on the next $500 million; .80% over
$2.5 billion; and .75% over $5 billion.
Small Cap 1.25% up to $1 billion; 1.15% on the next
$500 million; 1.10% on the next $500 million;
1.05% on the next $500 million; 1% over
$2.5 billion.
International Small Cap 1.25%
</TABLE>
The table below shows gross advisory fees paid by the Funds and any expense
reimbursements by the Adviser to them, which are described in the prospectus.
<TABLE>
<CAPTION>
ELEVEN MONTHS
TYPE OF ENDED SEPTEMBER 30, YEAR ENDED OCTOBER 31,
---------------------------
FUND PAYMENT 1997 1996 1995
- ---- ------- ----------------- ---- ----
<S> <C> <C> <C> <C>
Oakmark Advisory fee $43,705,462 $36,082,925 $21,215,738
Select Advisory fee 1,731,599 -- --
Small Cap Advisory fee 7,705,828 956,809 --
Equity and Advisory fee 140,973 69,005 --
Income Reimbursement 39,450 14,245 --
International Advisory fee 13,040,702 10,113,272 9,916,904
International Advisory fee 648,148 258,427 --
Small Cap Reimbursement -- 35,441 --
</TABLE>
The Agreement for each Fund was for an initial term expiring September 30,
1997. Each Agreement will continue from year to year thereafter so long as such
continuation is approved at least annually by (1) the board of trustees or the
vote of a majority of the outstanding voting securities of the Fund, and (2) a
majority of the trustees who are not interested persons of any party to the
Agreement, cast in person at a meeting called for the purpose of voting on such
approval. Each Agreement may be terminated at any time, without penalty, by
either the Trust or the Adviser upon sixty days' written notice, and is
automatically terminated in the event of its assignment as defined in the 1940
Act.
13
<PAGE>
The Adviser is a limited partnership managed by its general partner, Harris
Associates, Inc., whose directors are David G. Herro, Robert M. Levy, Roxanne M.
Martino, Victor A. Morgenstern, Anita M. Nagler, William C. Nygren, Neal Ryland,
Robert J. Sanborn and Peter S. Voss. Mr. Levy is the president and chief
executive officer of Harris Associates, Inc.
TRUSTEES AND OFFICERS
Information on the trustees and officers of the Trust is included in the
Funds' prospectus under "Trustees and Officers." All of that information is
incorporated herein by reference.
The addresses of the trustees are as follows:
Michael J. Friduss c/o MJ Friduss & Associates
1555 Museum Drive
Highland Park, Illinois 60035
Thomas H. Hayden c/o Bozell Worldwide, Inc.
625 North Michigan Avenue
Chicago, Illinois 60611-3110
Christine M. Maki c/o Hyatt Corporation
200 West Madison Street
Chicago, Illinois 60606
Victor A. Morgenstern c/o Harris Associates L.P.
Two North La Salle Street, Suite 500
Chicago, Illinois 60602
Allan J. Reich c/o D'Ancona & Pflaum
30 North La Salle Street, Suite 2900
Chicago, Illinois 60602
Marv R. Rotter c/o Rotter & Associates
5 Revere Drive, Suite 400
Northbrook, Illinois 60062-1571
Burton W. Ruder c/o The Academy Group
707 Skokie Boulevard, Suite 410
Northbrook, Illinois 60062
Peter S. Voss c/o New England Investment Companies, L.P.
399 Boylston Street
Boston, Massachusetts 02116
Gary N. Wilner, M.D. c/o Evanston Hospital
2650 Ridge Avenue
Evanston, Illinois 60201
Messrs. Morgenstern and Voss are trustees who are "interested persons" of
the Trust as defined in the 1940 Act. They and Dr. Wilner are members of the
executive committee, which has authority during intervals between meetings of
the board of trustees to exercise the powers of the board, with certain
exceptions.
14
<PAGE>
At December 31, 1997, the trustees and officers as a group owned
beneficially the following percentages of the outstanding shares of the Funds:
Select, 1.7%; Equity and Income, 12.5%; International Small Cap, 15.6%; and less
than 1% in the case of each other Fund.
The following table shows the compensation paid by the Trust for the eleven
months ended September 30, 1997 to each trustee who was not an "interested
person" of the Trust:
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF TRUSTEE FROM THE TRUST*
- --------------------------------------------------------------------------------
<S> <C>
Christine M. Maki $28,500
Michael J. Friduss 32,000
Thomas H. Hayden 26,000
Allan J. Reich 30,000
Marv R. Rotter 24,000
Burton W. Ruder 26,000
Gary N. Wilner, M.D. 33,000
- --------------------------------------------------------------------------------
</TABLE>
* The Trust is not part of a fund complex.
Other trustees who are "interested persons" of The Trust, as well as the
officers of the Trust, are compensated by the Adviser and not by The Trust. The
Trust does not provide any pension or retirement benefits to its trustees.
PRINCIPAL SHAREHOLDERS
The only persons known by the Trust to own of record or "beneficially"
(within the meaning of that term as defined in rule 13d-3 under the Securities
Exchange Act of 1934) 5% or more of the outstanding shares of any Fund as of
December 31, 1997 were:
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING
NAME AND ADDRESS FUND SHARES HELD
- ---------------- ---- -----------
<S> <C> <C>
Charles Schwab & Co. Inc. (1) Oakmark 31.9%
101 Montgomery Street Select 33.0
San Francisco, CA 94104-4122 Small Cap 41.3
Equity and Income 15.1
International 35.4
International Small Cap 31.1
Donaldson Lufkin & Jenrette Select 5.2
Securities
Corporation (1)
One Pershing Plaza
Jersey City, NJ 07399-0001
15
<PAGE>
David G. Herro (2) International Small Cap 9.8
Two North LaSalle Street, #500
Chicago, IL 60602
Clyde S. and Joan K. McGregor Equity and Income 9.5
Two North LaSalle Street, #500
Chicago, IL 60602
Morgan Stanley & Co., Inc. (1) Equity and Income 7.9
1 Pierrepont Plaza, 10th Floor
Brooklyn, NY 11201-2776
National Financial Services Corp.(1) Oakmark 8.4
Select 23.6
P.O. Box 3908 Small Cap 10.4
Church Street Station Equity and Income 5.1
New York, NY 10008-3908
</TABLE>
- -------------------------
(1) Shares are held for accounts of customers.
(2) 605,063 of these shares are included in shares held by Morgan Stanley &
Co., Inc.
PURCHASING AND REDEEMING SHARES
Purchases and redemptions are discussed in the Funds' prospectus under the
headings "Purchasing and Redeeming Shares - How to Purchase Shares," "Purchasing
and Redeeming Shares - How to Redeem Shares," and "Purchasing and Redeeming
Shares - Shareholder Services." All of that information is incorporated herein
by reference.
The net asset value per share of each Fund is determined by the Trust's
custodian, State Street Bank and Trust Company. Securities traded on securities
exchanges, or in the over-the-counter market in which transaction prices are
reported on the NASDAQ National Market System, are valued at the last sales
prices at the time of valuation or, lacking any reported sales on that day, at
the most recent bid quotations. Other securities traded over-the-counter are
also valued at the most recent bid quotations. Money market instruments having
a maturity of 60 days or less from the valuation date are valued on an amortized
cost basis. The values of securities of foreign issuers are generally based
upon market quotations which, depending upon local convention or regulation, may
be last sale price, last bid or asked price, or the mean between last bid and
asked prices as of, in each case, the close of the appropriate exchange or other
designated time. Securities for which quotations are not available and any
other assets are valued at a fair value as determined in good faith by or under
the direction of the board of trustees. All assets and liabilities initially
expressed in foreign currencies are converted into U.S. dollars at the mean of
the bid and offer prices of such currencies against U.S. dollars quoted by any
major bank or dealer. If such quotations are not available, the rate of
exchange will be determined in accordance with policies established in good
faith by the Board.
The Funds' net asset values are determined only on days on which the New
York Stock Exchange is open for trading. The NYSE is regularly closed on
Saturdays and Sundays and on New Year's Day, the third Monday in January and
February, Good Friday, the last Monday in May, Independence Day, Labor Day,
Thanksgiving and Christmas. If one of these holidays falls
16
<PAGE>
on a Saturday or Sunday, the NYSE will be closed on the preceding Friday or the
following Monday, respectively.
Trading in the portfolio securities of International Fund or International
Small Cap Fund (and of any other Fund, to the extent it invests in securities of
non-U.S. issuers) takes place in various foreign markets on certain days (such
as Saturday) when the Fund is not open for business and does not calculate its
net asset value. In addition, trading in the Fund's portfolio securities may
not occur on days when the Fund is open. Therefore, the calculation of net
asset value does not take place contemporaneously with the determinations of the
prices of many of the Fund's portfolio securities and the value of the Fund's
portfolio may be significantly affected on days when shares of the Fund may not
be purchased or redeemed.
Computation of net asset value (and the sale and redemption of a Fund's
shares) may be suspended or postponed during any period when (a) trading on the
New York Stock Exchange is restricted, as determined by the Securities and
Exchange Commission, or that exchange is closed for other than customary weekend
and holiday closings, (b) the Commission has by order permitted such suspension,
or (c) an emergency, as determined by the Commission, exists making disposal of
portfolio securities or valuation of the net assets of a Fund not reasonably
practicable.
Shares of any of the Funds may be purchased through certain financial
service companies, without incurring any transaction fee. For services provided
by such a company with respect to Fund shares held by that company for its
customers, the company may charge a fee of up to 0.30% of the annual average
value of those accounts. Each Fund may pay a portion of those fees, not to
exceed the estimated fees that the Fund would pay to its own transfer agent if
the shares of the Fund held by such customers of the company were registered
directly in their names on the books of the Fund's transfer agent. The balance
of those fees are paid by the Adviser.
The Trust has elected to be governed by Rule 18f-1 under the 1940 Act
pursuant to which it is obligated to redeem shares solely in cash up to the
lesser of $250,000 or 1% of the net asset value of a Fund during any 90-day
period for any one shareholder. Redemptions in excess of the above amounts will
normally be paid in cash, but may be paid wholly or partly by a distribution in
kind of marketable securities.
Due to the relatively high cost of maintaining small accounts, the Trust
reserves the right to redeem at net asset value the shares of any shareholder
whose account in any Fund has a value of less than the minimum amount specified
by the board of trustees, which currently is $1,000. Before such a redemption,
the shareholder will be notified that the account value is less than the minimum
and will be allowed at least 30 days to bring the value of the account up to the
minimum. The agreement and declaration of trust also authorizes the Trust to
redeem shares under certain other circumstances as may be specified by the board
of trustees.
In connection with the Exchange Plan, the Adviser acts as a Service
Organization for the Government Portfolio and the Tax-Exempt Diversified
Portfolio of Goldman Sachs Money Market Trust and the GS Short Duration Fund
Portfolio of Goldman Sachs Trust. For its services it receives fees at rates of
up to .50% of the average annual net assets of each account in those portfolios
established through the Exchange Plan, pursuant to 12b-1 plans adopted by those
investment companies.
17
<PAGE>
ADDITIONAL TAX INFORMATION
GENERAL. Each Fund intends to continue to qualify to be taxed as a
regulated investment company under the Internal Revenue Code of 1986, as
amended, so as to be relieved of federal income tax on its capital gains and net
investment income currently distributed to its shareholders. At the time of
your purchase, a Fund's net asset value may reflect undistributed income,
capital gains or net unrealized appreciation of securities held by that Fund. A
subsequent distribution to you of such amounts, although constituting a return
of your investment, would be taxable either as dividends or capital gain
distributions.
INTERNATIONAL FUND AND INTERNATIONAL SMALL CAP FUND. Dividends and
distributions paid by International Fund and International Small Cap Fund are
not eligible for the dividends-received deduction for corporate shareholders, if
as expected, none of such Funds' income consists of dividends paid by United
States corporations. Capital gain distributions paid by the Funds are never
eligible for this deduction.
Certain foreign currency gains and losses, including the portion of gain or
loss on the sale of debt securities attributable to foreign exchange rate
fluctuations are taxable as ordinary income. If the net effect of these
transactions is a gain, the dividend paid by either of these Funds will be
increased; if the result is a loss, the income dividend paid by either of these
Funds will be decreased.
Income received by International Fund or International Small Cap Fund from
sources within various foreign countries will be subject to foreign income taxes
withheld at the source. Under the Code, if more than 50% of the value of the
Fund's total assets at the close of its taxable year comprise securities issued
by foreign corporations, the Fund may file an election with the Internal Revenue
Service to "pass through" to the Fund's shareholders the amount of foreign
income taxes paid by the Fund. Pursuant to this election, shareholders will be
required to: (i) include in gross income, even though not actually received,
their respective pro rata share of foreign taxes paid by the Fund; (ii) treat
their pro rata share of foreign taxes as paid by them; and (iii) either deduct
their pro rata share of foreign taxes in computing their taxable income, or use
it as a foreign tax credit against U.S. income taxes (but not both). No
deduction for foreign taxes may be claimed by a shareholder who does not itemize
deductions.
Both International Fund and International Small Cap Fund intend to meet the
requirements of the Code to "pass through" to its shareholders foreign income
taxes paid, but there can be no assurance that a Fund will be able to do so.
Each shareholder will be notified within 60 days after the close of each taxable
year of a Fund, if the foreign taxes paid by the Fund will "pass through" for
that year, and, if so, the amount of each shareholder's pro rata share (by
country) of (i) the foreign taxes paid, and (ii) the Fund's gross income from
foreign sources. Of course, shareholders who are not liable for federal income
taxes, such as retirement plans qualified under Section 401 of the Code, will
not be affected by any such "pass through" of foreign tax credits.
TAXATION OF FOREIGN SHAREHOLDERS
The Code provides that dividends from net income (which are deemed to
include for this purpose each shareholder's pro rata share of foreign taxes paid
by International Fund and International Small Cap Fund (see discussion of "pass
through" of the foreign tax credit to U.S. shareholders), will be subject to
U.S. tax. For shareholders who are not engaged in a business in the U.S., this
tax would be imposed at the rate of 30% upon the gross amount of the dividend in
the absence of a Tax Treaty providing for a reduced rate or exemption from U.S.
taxation. Distributions of net long-term capital gains realized by these Funds
are not subject to tax unless
18
<PAGE>
the foreign shareholder is a nonresident alien individual who was physically
present in the U.S. during the tax year for more than 182 days.
PORTFOLIO TRANSACTIONS
Portfolio transactions for each Fund are placed with those securities
brokers and dealers that the Adviser believes will provide the best value in
transaction and research services for that Fund, either in a particular
transaction or over a period of time. Subject to that standard, portfolio
transactions for each Fund may be executed through Harris Associates Securities
L.P. ("HASLP"), a registered broker-dealer and an affiliate of the Adviser.
In valuing brokerage services, the Adviser makes a judgment as to which
brokers are capable of providing the most favorable net price (not necessarily
the lowest commission) and the best execution in a particular transaction. Best
execution connotes not only general competence and reliability of a broker, but
specific expertise and effort of a broker in overcoming the anticipated
difficulties in fulfilling the requirements of particular transactions, because
the problems of execution and the required skills and effort vary greatly among
transactions.
Although some transactions involve only brokerage services, many involve
research services as well. In valuing research services, the Adviser makes a
judgment of the usefulness of research and other information provided by a
broker to the Adviser in managing a Fund's investment portfolio. In some cases,
the information, e.g., data or recommendations concerning particular securities,
relates to the specific transaction placed with the broker, but for the greater
part the research consists of a wide variety of information concerning
companies, industries, investment strategy and economic, financial and political
conditions and prospects, useful to the Adviser in advising the Funds.
The Adviser is the principal source of information and advice to the Funds,
and is responsible for making and initiating the execution of the investment
decisions for each Fund. However, the board of trustees recognizes that it is
important for the Adviser, in performing its responsibilities to the Funds, to
continue to receive and evaluate the broad spectrum of economic and financial
information that many securities brokers have customarily furnished in
connection with brokerage transactions, and that in compensating brokers for
their services, it is in the interest of the Funds to take into account the
value of the information received for use in advising the Funds. Consequently,
the commission paid to brokers (other than HASLP) providing research services
may be greater than the amount of commission another broker would charge for the
same transaction. The extent, if any, to which the obtaining of such
information may reduce the expenses of the Adviser in providing management
services to the Funds is not determinable. In addition, it is understood by the
board of trustees that other clients of the Adviser might also benefit from the
information obtained for the Funds, in the same manner that the Funds might also
benefit from information obtained by the Adviser in performing services to
others.
HASLP may act as broker for a Fund in connection with the purchase or sale
of securities by or to the Fund if and to the extent permitted by procedures
adopted from time to time by the board of trustees of the Trust. The board of
trustees, including a majority of the trustees who are not "interested"
trustees, has determined that portfolio transactions for a Fund may be executed
through HASLP if, in the judgment of the Adviser, the use of HASLP is likely to
result in prices and execution at least as favorable to the Fund as those
available from other qualified brokers and if, in such transactions, HASLP
charges the Fund commission rates at least as favorable to the Fund as those
charged by HASLP to comparable unaffiliated customers in similar transactions.
The board of trustees has also adopted procedures that are reasonably designed
to provide that any commissions, fees or other remuneration paid to HASLP are
consistent with the foregoing standard. The Funds will not effect principal
transactions with HASLP. In executing transactions
19
<PAGE>
through HASLP, the Funds will be subject to, and intend to comply with, section
17(e) of the 1940 Act and rules thereunder.
The reasonableness of brokerage commissions paid by the Funds in relation
to transaction and research services received is evaluated by the staff of the
Adviser on an ongoing basis. The general level of brokerage charges and other
aspects of the Funds' portfolio transactions are reviewed periodically by the
board of trustees.
Transactions of the Funds in the over-the-counter market and the third
market are executed with primary market makers acting as principal except where
it is believed that better prices and execution may be obtained otherwise.
Although investment decisions for the Funds are made independently from
those for other investment advisory clients of the Adviser, it may develop that
the same investment decision is made for both a Fund and one or more other
advisory clients. If both a Fund and other clients purchase or sell the same
class of securities on the same day, the transactions will be allocated as to
amount and price in a manner considered equitable to each.
The Funds do not purchase securities with a view to rapid turnover.
However, there are no limitations on the length of time that portfolio
securities must be held. Portfolio turnover can occur for a number of reasons,
including general conditions in the securities market, more favorable investment
opportunities in other securities, or other factors relating to the desirability
of holding or changing a portfolio investment. A high rate of portfolio
turnover would result in increased transaction expense, which must be borne by
the Fund. High portfolio turnover may also result in the realization of capital
gains or losses and, to the extent net short-term capital gains are realized,
any distributions resulting from such gains will be considered ordinary income
for federal income tax purposes. The portfolio turnover rates for the Funds are
set forth in the prospectus under "Financial Highlights."
The following table shows the aggregate brokerage commissions (excluding
the gross underwriting spread on securities purchased in initial public
offerings) paid by each Fund during the periods indicated, as well as the
aggregate commissions paid to affiliated persons of the Trust.
<TABLE>
<CAPTION>
Eleven Months Ended Year Ended October 31,
September 30, -------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Oakmark Fund
Aggregate commissions $3,094,186 (100%) $2,863,961 (100%) $2,100,849 (100%)
Commissions paid to affiliates* 997,845 (32.2%) 1,192,641 (41.6%) 389,339 (18.5%)
Select Fund
Aggregate commissions 750,698 (100%) -- --
Commissions paid to affiliates* 341,805 (45.5%) -- --
Small Cap Fund
Aggregate commissions 1,906,488 (100%) 404,602 (100%) --
Commissions paid to affiliates* 401,345 (21.0%) 132,729 (32.8%) --
Equity and Income Fund
Aggregate commission 24,588 (100%) 19,797 (100%) --
Commissions paid to affiliates* 15,611 (63.5%) 14,487 (73.2%) --
International Fund
Aggregate commissions 5,319,725 (100%) 2,804,611 (100%) 2,609,780 (100%)
Commissions paid to affiliates* 9,732 (0.2%) 82,872 (3.0%) 71,600 (2.7%)
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
International Small Cap Fund
Aggregate commissions 332,214 (100%) 198,847 (100%) --
Commissions paid to affiliates* 732 (0.2%) 6,128 (3.1%) --
</TABLE>
* The percent of the dollar amount of each Fund's aggregate transactions
involving the Fund's payment of brokerage commissions that were executed
through affiliates for each of the periods is shown below.
<TABLE>
<CAPTION>
Year Ended October 31,
Eleven Months Ended ----------------------
Fund September 30, 1997 1996 1995
---- ------------------ ---- ----
<S> <C> <C> <C>
Oakmark 36.5% 47.0% 7.5%
Select 48.0 - -
Small Cap 23.2 40.0 -
Equity and Income 67.0 78.0 -
International 0.4 5.0 1.6
International Small Cap 0.5 0.4 -
</TABLE>
Of the aggregate brokerage commissions paid during the eleven months ended
September 30 1997, the Funds paid the following commissions to brokers who
furnished research services: Oakmark, $506,571; Select, $109,737; Small Cap,
$277,694; Equity and Income, $1,116; International, $5,122,190; International
Small Cap, $315,422.
DECLARATION OF TRUST
The Agreement and Declaration of Trust under which the Trust has been
organized ("Declaration of Trust") disclaims liability of the shareholders,
trustees and officers of the Trust for acts or obligations of the Trust and
requires that notice of such disclaimer be given in each agreement, obligation,
or contract entered into or executed by the Trust or the board of trustees. The
Declaration of Trust provides for indemnification out of the Trust's assets for
all losses and expenses of any shareholder held personally liable for
obligations of the Trust. Thus, although shareholders of a business trust may,
under certain circumstances, be held personally liable under Massachusetts law
for the obligations of the Trust, the risk of a shareholder incurring financial
loss on account of shareholder liability is believed to be remote because it is
limited to circumstances in which the disclaimer is inoperative and the Trust
itself is unable to meet its obligations. The risk to any one series of
sustaining a loss on account of liabilities incurred by another series is also
believed to be remote.
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 8510, Boston Massachusetts
02266-8510 is the custodian for the Trust. It is responsible for holding all
securities and cash of each Fund, receiving and paying for securities purchased,
delivering against payment securities sold, receiving and collecting income from
investments, making all payments covering expenses of the Funds, and performing
other administrative duties, all as directed by authorized persons of the Trust.
The custodian also performs certain portfolio accounting services for the Funds,
for which each Fund pays the custodian a monthly fee. The fee paid by Oakmark
Fund is $2,500 per month. The fee paid by Oakmark International is $3,000 per
month. The fee paid by each of Select Fund, Small Cap Fund and Equity and
Income Fund is $2,500 per month and the fee paid by International Small Cap Fund
is $3,000 per month. The custodian does not exercise any supervisory function
in such matters as the purchase and sale of portfolio securities, payment of
dividends, or payment of expenses of a Fund. The Trust has authorized the
custodian to deposit certain portfolio securities of each Fund in central
depository systems as permitted under federal
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<PAGE>
law. The Funds may invest in obligations of the custodian and may purchase or
sell securities from or to the custodian.
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, 33 West Monroe Street, Chicago, Illinois 60603, audits
and reports on each Fund's annual financial statements, reviews certain
regulatory reports and the Funds' federal income tax returns, and performs other
professional accounting, auditing, tax and advisory services when engaged to do
so by the Trust.
FINANCIAL STATEMENTS
Copies of the annual reports for each Fund for the eleven months ended
September 30, 1997 accompany this Statement of Additional Information. Those
reports contain financial statements, notes thereto, supplementary information
entitled "Condensed Financial Information" and reports of independent auditors,
all of which (but no other part of the reports), and the notes thereto that also
accompany this Statement of Additional Information, are incorporated herein by
reference.
A copy of the Funds' Prospectus and additional copies of the reports to
shareholders may be obtained from the Trust at no charge by writing to the Trust
at the address shown on the cover page of this statement of additional
information, or by telephoning the number shown on the cover page.
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<PAGE>
APPENDIX -- BOND RATINGS
A rating by a rating service represents the service's opinion as to the
credit quality of the security being rated. However, the ratings are general
and are not absolute standards of quality or guarantees as to the
credit-worthiness of an issuer. Consequently, the Adviser believes that the
quality of debt securities in which the Fund invests should be continuously
reviewed and that individual analysts give different weightings to the various
factors involved in credit analysis. A rating is not a recommendation to
purchase, sell, or hold a security, because it does not take into account market
value or suitability for a particular investor. When a security has received a
rating from more than one service, each rating should be evaluated
independently. Ratings are based on current information furnished by the issuer
or obtained by the rating services from other sources which they consider
reliable. Ratings may be changed, suspended, or withdrawn as a result of
changes in or unavailability of such information, or for other reasons.
The following is a description of the characteristics of ratings used by
Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Corporation
("S&P").
RATINGS BY MOODY'S:
Aaa. Bonds rated Aaa are judged to be the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or an exceptionally stable margin and
principal is secure. Although the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such bonds.
Aa. Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in the Aaa bonds, fluctuation of protective elements may
be of greater amplitude, or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa bonds.
A. Bonds rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa Bonds rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
other good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B. Bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa. Bonds rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
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<PAGE>
Ca. Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C. Bonds rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Ratings By Standard & Poor's:
AAA. Debt rated AAA has the highest rating. Capacity to pay interest and
repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small degree.
A. Debt rated A has a very strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions, or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB-B-CCC-CC. Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. While such
bonds will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
C. This rating is reserved for income bonds on which no interest is being
paid.
D. Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
NOTE: The ratings from AA to B may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within the major rating
categories.
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